Handbook of Asset and Liability Management: From models to optimal return strategies

3

Balance Sheet Presentation

Tout fait somme.

Assets and liability management means dealing with assets and liabilities, it means dealing with “balance sheet” and “accounting” notions.

A/L managers are not accountants and many of them know very little about the details of accounting standards.

Nevertheless, to understand the whole ALM business, the A/L manager needs to understand his balance sheet and to have some notions of accounting.

3.1 GENERAL BALANCE SHEET PRESENTATION

We will take our balance sheet main example from a financial company example. We have also included an example of an insurance company balance sheet.

In the balance sheet, the total assets are equal to the total liabilities. This obvious remark will be very helpful when considering the further product carry cost. Each asset (respectively each liability) has its liability (respectively each asset); by default the corresponding liability (asset) is a treasury refinancing (at a DD rate cost).

The asset is a mix of investments, of treasury products and of commercial trades. The liability is a mix of debt, of equity and of commercial trades.

From this accounting presentation, the A/L manager's work will start with the reorganization of the balance sheet.

3.2 A/L MANAGER'S BALANCE SHEET PRESENTATION

ALM book separation is based on trading position isolation and on the differentiation of the commercial book with the capital book.

Book separation by the A/L manager is motivated by the result of separation that